Evaluating the effects of tax spillovers in a global setting

In summary

Tax spillovers are adverse effects that a country’s tax regulations have on other areas of its tax system and those of other countries. Analysing these tax spillovers can help governments identify gaps in revenue, against the amounts that would be collected if all taxpayers contributed at the correct level.

In the UK, 10 per cent of tax revenue is unrealised in such a way. In Italy this is 25 per cent, and it can be even higher in developing countries.

Richard Murphy, Professor of Practice and his co-author, Professor Andrew Baker, University of Sheffield devised the Baker-Murphy framework for evaluating negative impacts that tax policies can create – the first non-econometric appraisal tool to do so.

What did we explore and how?

Professor Murphy and his co-author first proposed a qualitative evaluation methodology in a paper for the All-Party Parliamentary Group (APPG) in 2017, as a response to the concept of quantitative tax spillover analysis introduced by the International Monetary Fund (IMF).

The new methodology was designed to overcome problems with solely quantitative approaches, and had three principle aims: capture the aspects of tax spillover omitted by quantitative study; identify, evaluate and discourage harmful tax competition; and directly identify aspects of the tax system that undermined its effectiveness.

From stakeholder interviews and surveys, along with analysis of regulations by assessors from Non-Governmental Organisations (NGOs), the researchers illustrated domestic and international spillover in risk appraisal grids to indicate problem areas.

The research concluded that spillover analysis should be undertaken on a country-by -country basis overseen by international organisations such as the IMF and World Bank.

The toolkit was then applied to the UK to produce the first ever full-length qualitative spillover assessment, highlighting 13 policy reform recommendations that would reduce spillover risks generated by the UK tax system.

Professor Murphy’s 2017 blog on tax research attracted a total readership of 3.1 million in 2020.

In his foreword to the 2017 All Party Parliamentary Group report, Liam Byrne MP wrote:

This paper sets out a new framework for calculating the economic damage of a global race to the bottom on tax. It needs urgently to be finessed, tested and applied.

Benefits and influence of this research

The Baker-Murphy framework has enabled NGOs, international organisations and governments to rank international tax practices in terms of competition risks and vulnerability to revenue losses.

Three NGOs, Oxfam, Action Aid and Eurodad responded to an IMF consultation on the future of corporation tax in December 2018 by calling for international organisations to conduct evaluations using the Baker-Murphy framework.

ActionAid went further, calling for new policy drafting and endorsed a broad qualitative approach to spillover that drew on the Baker-Murphy framework.

The Tax Justice Network’s Chair of the Board also described the framework as a “game changer”, stating it would “increase the capacity of NGOs and other civil society actors to hold governments more accountable for their tax policies.”

The World Bank-funded Global Initiative for Financial Transparency (GIFT) proclaimed the framework central to its own continuing work on tax transparency, and commissioned the researchers as consultants to help countries understand the tax revenue cycle and set good practice principles for NGOs.

In collaboration with GIFT, the International Budget Partnership organisation in Washington is adopting the methodology as the gold standard level of tax transparency in its Tax Equity Initiative.

The Director of the Global Initiative for Fiscal Transparency has also stated the significance of the Baker-Murphy framework as providing “a route map for increasing civil society participation in tax policy around the world.”